Speaker: Chung Tran (ANU)

Date & time: Tuesday 13 June 2023, 2.00pm–3.30pm

Venue: Lennox Seminar Room and Zoom

An income tax system with dividend imputation allows companies to pass on profit taxes to shareholders in form of franking tax credits. Would dividend imputation eliminate double taxation of capital income and lead to more savings, investment and capital accumulation?

We study this question in the context of a small open economy model with heterogeneous firms and investors. We find significant increases in capital accumulation and output under dividend imputation. Removing franking tax credits discourages domestic households/investors to save and invest; meanwhile, inflows of foreign capital from international markets do not fully offset such reduction in domestic savings.

Richer households bear larger burden of capital income taxation, while poorer households enjoy welfare gains from public transfers financed by additional tax revenue. Lowering taxes on dividend and capital gains, i.e., the American solution to the double taxation issue, mitigates the adverse distributional effects; however, aggregate capital and output are still relatively lower. Interestingly, in our small open economy model international investors are not marginal investors due to heterogeneity in firm investment and valuation.

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